Insurance is used to protect businesses and individuals from certain risks. Insurance enables businesses and individuals to shift their risk of loss to an insurance company in exchange for payment of insurance premiums. For example, life insurance provides an individual's designated beneficiary a benefit upon the death of the individual in exchange for premium payments by the individual during his life.
Life insurance policies are typically either protection policies or investment policies. Protection policies are designed to provide a benefit to the designated beneficiary upon the occurrence of a specified event, e.g. the death of the individual policy holder, in exchange for premium payments. Insurance companies may invest the premiums and thus increase or decrease the value of the collected premiums.
Investment policies provide an investment vehicle for the growth of the individual's premium payments while still providing the option of having a benefit paid to the designated beneficiary at the time of the individual's death. Types of life insurance investment policies include whole life, universal life, and variable life policies.
Whole life insurance policies may contain two components: a term portion which pays a face amount of the policy to the designated beneficiary upon the individual's death and an investment portion which builds a cash value that the individual can borrow against during their lifetime. The cash value may be accessed at any time through policy loans. The premium payment for a whole life insurance policy may be based on the cost of the term portion and the cost of the investment portion.
Variable life policies may permit an individual to invest a portion of their premium payments in securities, e.g. stocks and bonds. The benefit provided to the designated beneficiary upon the individual's death and the cash value of the policy may depend on the performance of the variable life investments.
Universal life insurance policies may provide payment of a face amount of the policy to a designated beneficiary upon the individual's death in exchange for premium payments during the life of the individual. Universal life insurance policies may include a cash value portion that is funded by the amount by which the premium payments exceed the current cost of insurance.
Typically, a policy value account is created when an insurance company issues a new policy. The policy value account represents the cash value portion of the policy. As described above, the policy value account may be invested by the insurance company or by the individual policy holder.
Since a life insurance company may aggregate premiums for investment, the effects of the policy holders' patterns of paying premiums may be shared among all of the policies with respect to which premiums have been paid, benefitting some policy holders while not benefitting others. New methods are needed for managing policy value accounts.